U.S. wants leaner military; budget growth to slow

ChristopherHinton

WASHINGTON (MarketWatch) — The United States will reorganize its military for more small-scale operations such as counterterrorism, while also strengthening its presence in the Asia-Pacific region, President Barack Obama said Thursday.

Though the growth for the U.S. defense budget is expected to slow over the next decade, it should remain robust, with the military’s shifting priorities benefiting ship builders and aircraft manufacturers. It should also help companies that build reconnaissance equipment or provide intelligence analysis.

“Were the budget to hold in the framework laid out by the administration, the outlook would be more positive than our scenarios,” said Douglas Harned, equity analyst with Bernstein Research. “This is particularly true since the Republican candidate leading the polls, Mitt Romney, has advocated still-greater spending.”

Move over, Jason Bourne

(3:29)

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Procurement programs sustaining cost overruns or no clear purpose, however, remain vulnerable to cuts. Purchasing new military ground transportation could also be scaled back.

Details, including spending and force sizes, will be released sometime after the president’s State of the Union address later this month, Defense Secretary Leon Panetta said during a joint Pentagon news conference with Obama.

“The announcement has set the scene for some program and force reductions in the fiscal 2013 request next month, but it does not look like these will be radical, with land systems and services probably doing less well than the U.S. Air Force and Navy,” said Robert Stallard, an equity analyst with RBC Capital Markets.

That should bring a sigh of relief for companies such as Boeing Co. and United Technologies Corp. unit Sikorsky, which build military aircraft, and ship builders Huntington Ingalls Industries Inc. and General Dynamics Corp.

Northrop Grumman Corp. and Lockheed Martin Corp., which provide unmanned aircraft and intelligence-gathering equipment and data analysis, should also do well.

At last check, the Spade Defense Index (DXS), a basket of military-contractor stocks, declined less than 1%. For 2011, the benchmark is off about 4%, but has climbed nearly 11% in the past three months as investors become more confident that rumored Pentagon budget cuts won’t be as severe as feared.

Obama said reorganizing military priorities will address 21st-century threats while also clamping down on the Pentagon’s accelerated budget growth.

Since 2000, the U.S. defense budget has ballooned to $712 billion in fiscal 2011 from just under $312 billion, mostly because of military operations in the Afghanistan and Iraq, which are now drawing to a close. Meanwhile, the national debt has climbed to more than $15 trillion from $5 trillion over the same period.

“As we look beyond the wars in Iraq and Afghanistan, and the end of long-term nation-building with large military footprints, we’ll be able to ensure our security with smaller conventional ground forces,” Obama said during the news conference.

“We’ll continue to get rid of outdated Cold War-era systems so that we can invest in the capabilities we need for the future, including intelligence, surveillance and reconnaissance; counterterrorism; countering weapons of mass destruction and the ability to operate in environments where adversaries try to deny us access.”

Obama and Panetta took efforts to ensure Europe that the United States will honor its commitments to NATO and the region’s defense, and that an “evolving” force structure on the continent will be a strong one.

The Russian military, the prime reason for maintaining a U.S. ground presence in Europe, has been in dramatic decline since the collapse of the Soviet Union, and barely poses a threat, according to Loren Thompson, a defense analyst with the Lexington Institute, a Washington D.C. think tank.

Meanwhile, China has become a rising power, and the country has become bolder in its territorial disputes with South Korea, Vietnam, Japan and Taiwan.

“The closest land war plausible for the U.S. would be on the Korean peninsula” because of North Korea’s instability, Thomson said in an interview. “But in trying to contain China, the U.S. will rely on its navy and long-range air power.”

Elsewhere, small and nimble special-force teams should be able to strike and deter terrorist activity or attempts to hurt U.S. interests in the Middle East and Africa.

Obama and the Pentagon are hoping to starve off sharp cuts for defense spending. Last year, a congressional joint select committee on deficit reduction failed to find some $1.2 trillion in budget cuts, triggering across-the-board cuts that include reducing the military budget by $600 billion over 10 years, starting in 2013.

Most experts, however, expect Congress to legislate its way out of the automatic cuts.

The Pentagon is already planning to reduce spending by about $400 billion over 12 years as it prepares for a decline in budget growth.

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